Principles of Microeconomics

class: center, middle, inverse, title-slide

.title[
# Principles of Microeconomics
]
.author[
### ECO 2306
]
.date[
### <em>Fall 2022</em>
]

---

class: center, middle, inverse

# Chapter 16: 
## The Markets for Labor and Other Factors of Production

---

## Demand for Labor
.panelset[
.panel[.panel-name[Intro]
.pull-left[
**Factors of production**
- labor, capital, natural resources, and other inputs
- labor markets are important and different from other inputs

**Labor markets**
- Firms are buyers, workers are sellers
  - Does this make much difference?
  - Do workers behave like other sellers?
  - Can we explain why different workers are paid different amounts?
- Leads to broader questions of inequality
- **Derived demand**: depends on the demand for the good the factor produces
]
.pull-right[
![](data:image/png;base64,#images/factors_of_production.png)
]
]
.panel[.panel-name[Apple]
Suppose Apple wants to hire some workers to make iPhones.
.pull-left[
- Apple doesn't have a *preference* for hiring workers, but wants to *maximize profit* by hiring the right number of workers
- Apple’s demand for workers is a *derived demand*: 
  - **derived demand** depends on the demand for the good the factor produces
  - demand for labor to make iPhones is derived from the *underlying consumer demand* for iPhones

Apple’s demand for workers depends on:
1. *additional iPhones* Apple can produce if it hires one more worker
2. *additional revenue* Apple receives from selling the additional iPhones
]
.pull-right[
![](data:image/png;base64,#images/apple_workers.png)
]
]
.panel[.panel-name[MRP Schedule]
.pull-left[
Assume that Apple is a price-taker in the market for labor and in the market for smart phones.
Then as Apple increases the number of workers:
1. Apple sells more iPhones.
2. Apple receives more revenue ($500 per phone).
3. Apple’s wage bill goes up.
4. Profit goes up or down, depending on whether 2. or 3. is greater.

- **Marginal product of labor:** The additional output a firm produces as a result of hiring one more worker.
- **Marginal revenue product of labor (MRP):** ultimately, the firm cares about the money it will receive, so it calculates the change in its revenue from hiring one more worker.

]
.pull-right[
<table class="table table-striped table-hover table-condensed" style="font-size: 18px; margin-left: auto; margin-right: auto;">
<caption style="font-size: initial !important;">Table: The Marginal Revenue Product of Labor and the Demand for Labor </caption>
 <thead>
  <tr>
   <th style="text-align:center;"> L </th>
   <th style="text-align:center;"> Q </th>
   <th style="text-align:center;"> MP </th>
   <th style="text-align:center;"> P </th>
   <th style="text-align:center;"> MRP= P * MP </th>
   <th style="text-align:center;"> W </th>
   <th style="text-align:center;"> MProfit = MRP - W </th>
  </tr>
 </thead>
<tbody>
  <tr>
   <td style="text-align:center;"> 0 </td>
   <td style="text-align:center;"> 0 </td>
   <td style="text-align:center;"> NA </td>
   <td style="text-align:center;"> 500 </td>
   <td style="text-align:center;"> NA </td>
   <td style="text-align:center;"> 1000 </td>
   <td style="text-align:center;"> NA </td>
  </tr>
  <tr>
   <td style="text-align:center;"> 1 </td>
   <td style="text-align:center;"> 6 </td>
   <td style="text-align:center;"> 6 </td>
   <td style="text-align:center;"> 500 </td>
   <td style="text-align:center;"> 3000 </td>
   <td style="text-align:center;"> 1000 </td>
   <td style="text-align:center;"> 2000 </td>
  </tr>
  <tr>
   <td style="text-align:center;"> 2 </td>
   <td style="text-align:center;"> 11 </td>
   <td style="text-align:center;"> 5 </td>
   <td style="text-align:center;"> 500 </td>
   <td style="text-align:center;"> 2500 </td>
   <td style="text-align:center;"> 1000 </td>
   <td style="text-align:center;"> 1500 </td>
  </tr>
  <tr>
   <td style="text-align:center;"> 3 </td>
   <td style="text-align:center;"> 15 </td>
   <td style="text-align:center;"> 4 </td>
   <td style="text-align:center;"> 500 </td>
   <td style="text-align:center;"> 2000 </td>
   <td style="text-align:center;"> 1000 </td>
   <td style="text-align:center;"> 1000 </td>
  </tr>
  <tr>
   <td style="text-align:center;"> 4 </td>
   <td style="text-align:center;"> 18 </td>
   <td style="text-align:center;"> 3 </td>
   <td style="text-align:center;"> 500 </td>
   <td style="text-align:center;"> 1500 </td>
   <td style="text-align:center;"> 1000 </td>
   <td style="text-align:center;"> 500 </td>
  </tr>
  <tr>
   <td style="text-align:center;font-weight: bold;background-color: #18BC9C !important;"> 5 </td>
   <td style="text-align:center;font-weight: bold;background-color: #18BC9C !important;"> 20 </td>
   <td style="text-align:center;font-weight: bold;background-color: #18BC9C !important;"> 2 </td>
   <td style="text-align:center;font-weight: bold;background-color: #18BC9C !important;"> 500 </td>
   <td style="text-align:center;font-weight: bold;background-color: #18BC9C !important;"> 1000 </td>
   <td style="text-align:center;font-weight: bold;background-color: #18BC9C !important;"> 1000 </td>
   <td style="text-align:center;font-weight: bold;background-color: #18BC9C !important;"> 0 </td>
  </tr>
  <tr>
   <td style="text-align:center;"> 6 </td>
   <td style="text-align:center;"> 21 </td>
   <td style="text-align:center;"> 1 </td>
   <td style="text-align:center;"> 500 </td>
   <td style="text-align:center;"> 500 </td>
   <td style="text-align:center;"> 1000 </td>
   <td style="text-align:center;"> -500 </td>
  </tr>
</tbody>
</table>
- Apple is selling each additional iPhone for the same price, so `$MRP = P*MP$`
]
]
.panel[.panel-name[MRP and Wage]
.pull-left[
The previous slide suggested hiring 5 workers would maximize profits.

We can see this by:
- Looking at the additional profit from hiring one more worker, or
- Using the `$MC = MR$` rule for maximizing profit; for labor, this becomes `$W = MRP$`.

]
]
.panel[.panel-name[Labor Demand]
.pull-left[
**Firm's Labor Demand**
- We can graph the *MRP*: it is the firm’s demand curve for labor.
- The profit-maximizing number of workers comes at the quantity of labor where the wage hits the *MRP* curve.
- If the wage changed, so would the profit-maximizing number of workers to hire.
]
.pull-right[
<img src="data:image/png;base64,#images/fig_16_1.png" width="100%" style="display: block; margin: auto;" />
]

**Market Labor Demand**
- At each wage, we can determine the number of workers firms want to hire; summing across firms gives the market quantity of labor demanded at that wage.
- Doing this for each wage, in turn, will reveal the market labor demand curve, *ceteris paribus*.
- Price of output, abilities of workers, etc. are held constant because changes cause shifts.
]
.panel[.panel-name[Factors]

Factors that shift the marginal revenue product of labor curve

1. Increases in **human capital** 
    - the accumulated training and skills that workers possess
    - better workers produce more, increasing their MRP and increasing demand for workers
2. Changes in **technology**
    - Improvements in technology allow workers to be more productive
    - Shift the labor demand curve to the right
3. Changes in the **(output) price** the firm produces
    - A higher price increases M R P, shifting labor demand to the right
    - A lower price decreases M R P, shifting labor demand to the left
4. Changes in the **quantity of other inputs**
    - Workers can typically produce more if they have more machinery and other inputs available to them
    - Increases in the quantity of these inputs tend to increase the productivity of workers, increasing the demand for labor
5. Changes in the **number of firms** in the market
    - Increasing the number of firms increases the demand for labor
    - Decreasing the number of firms decreases the demand for labor
]

]

---

## Labor Supply
.panelset[
.panel[.panel-name[Intro]
Labor supply refers to the decisions of individuals about how much to work
- Individuals have a limited amount of time.
- Labor economists assume they divide that time between **labor** (working) and **leisure** (not working).
- Leisure is considered a *normal good*, so at really high wages,
the labor supply curve bends backwards

Supply curve
- The labor supply curve measures the willingness to supply
labor at the lowest wage
- The wages along the supply curve are called the **reservation wage** - they are the absolute minimum the person would need to rationally induce they provide that unit of work

How would an increase in hourly wage affect how much you wanted to work?

**Substitution effect**: an increase in wages raises the opportunity cost of leisure, so we want more work/less leisure

**Income effect**: an increase in wages (income) at certain point means you are able to afford more leisure even though opportunity cost is higher
]
.panel[.panel-name[Supply Curve]
.pull-left[
<img src="data:image/png;base64,#images/fig_16_2.png" width="100%" style="display: block; margin: auto;" />
]
.pull-right[
<img src="data:image/png;base64,#images/fig_16_3.png" width="100%" style="display: block; margin: auto;" />
]
]
.panel[.panel-name[Market Supply]
.pull-left[
While individual labor supply curves might bend backward, we will assume that market labor supply curves do not.

Why? 
- We are usually examining single labor markets, like the market for fast food workers.
- As the wage paid to fast food workers rises, more people want to work in fast food, compared with the alternatives (not working, or working in a comparable industry).
- Also, for most interesting labor markets, the wage rate will probably not be high enough to reach the backward-bending section of the labor supply curve.
]
.pull-right[
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.panel[.panel-name[Factors]

1. Changing **population**
  - Increases or decreases in the number of available workers (due to changes in birth/death rates, or immigration/emigration).
2. Changing **demographics**
  - Demographics refers to the composition of the population. 
  - For example, low birth rates in Japan, Russia, and China have resulted in rapidly aging populations and reduced the number of people available for work.
  - Similarly, the role of women in the labor force has changed significantly over the last century: 
  - 21 percent of women were in the labor force in the U.S. in 1900; 
  - In 2019, the figure is 57 percent.
3. Changing **alternatives**
  - People have alternatives to working. 
  - A change in how attractive they are changing the supply of labor, such as changing wage rates in alternative jobs, or availability of unemployment benefits.

]
.panel[.panel-name[Equilibrium]

]
.panel[.panel-name[Immigration]

]

---

## Differences in Wages
.panelset[.panel[.panel-name[Intro]
We know there are large differences in wages
- Demand and supply analysis can help to explain these differences
- But there may be other, more subtle, reasons why different workers receive different wages

Reasons
1.  **Marginal Revenue Product of Labor**
  - Why do baseball players make more than college professors?
  - Supply of baseball players is much less, while demand is very high
  - Provide more revenue in advertising, ticket sales, etc. (MRP is high)
2. **Compensating Differentials**
  - Higher wages that compensate workers for unpleasant/risky aspects of a job (e.g. death)
  - e.g. high-rise window cleaners, under-water welders
3. **Labor Unions**
4. **Economic discrimination**
  - paying a person a lower wage or excluding a person from an occupation on the basis of an irrelevant characteristic like race or gender
]

.panel[.panel-name[Discrimination]
.pull-left[
Differentials by 
- gender
- race

Why?
- economic discrimination?
- something else?

Equal Pay Act (1963) and the Civil Rights Act (1964) make discrimination illegal
- Labor economists estimate that a large portion of these differentials can be explained by labor market characteristics
- We will examine some of these characteristics next
]
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]

.panel[.panel-name[Other Explanations I]
**Differences in education**
- Individuals with more education earn more; see a billion studies on this
- White males have more education than black males. Using data from the 2014 CPS on males aged 18-35
  - White males: 14% no high school degree, 30.2% high school only, 25% some college, 22.7% college
  - Black males: 15.4% no high school degree, 36.9% high school only, 28.3% some college, 12.8% college

**Differences in experience**
- Women who have children leave the labor market, reducing work experience
- Higher unemployment among Blacks

**Different preferences for jobs**
- Significant differences exist between the types of jobs held by women and men
- Women represent 90% or more of the people employed in some relatively low-paying jobs such as preschool teachers, whereas men represent more than 90% or more in higher paying jobs

]

.panel[.panel-name[Other Explanations II]
**Labor market discrimination**
- "Are Emily and Greg More Employable than Lakisha and Jamal?" by Bertrand and Mullainthan (2004)
  - Randomly assigned the top ten most "White" and "Black" sounding male and female names (using the Census) to three resumes: a low quality, medium quality and high quality resume
  - White sounding names were 50 percent more likely to be called back than the Black sounding names, holding constant the resume quality
- Numerous studies find that even controlling for education, experience and preferences, there's still a racial gap in pay

**Unions**
- Unions collectively bargain on behalf of union members for higher wages and better job amenities
- Union workers earned about $200 more than non-union workers in 2013
]

.panel[.panel-name[Discrimination and Wages]
.left-column[
Market forces can remove discrimination

Reasons discrimination persists:
- Worker discrimination
- Customer discrimination
- Negative feedback loops
- Implicit bias (e.g. A.I. in job apps)
]
.right-column[
.pull-left[
<img src="data:image/png;base64,#images/fig_16_9a.png" width="100%" style="display: block; margin: auto;" />
]
.pull-right[
<img src="data:image/png;base64,#images/fig_16_9b.png" width="100%" style="display: block; margin: auto;" />
]
]
]

]

---